SINGAPORE (Jan 15): RHB is maintaining its “buy” call on ST Engineering (STE) with a $3.97 target price, which implies 4% yield.

In a Tuesday report, analyst Shekhar Jaiswal says he expects STE to see a revival of profit growth due to increased capacity and capabilities in the Aerospace segment; delivery of smart city-related contracts both within and outside of Singapore; as well as defence-related contracts.

A recent revival in Marine order wins and the completion of the group’s acquisition of Middle River Aircraft Systems (MRAS) would serve as re-rating catalysts going forward, he adds.

“STE should be able to complete the acquisition of MRAS by end-1Q19. The acquisition, which will be fully-funded by USD-denominated debt, could lift our 2019F-2020F earnings by 4-5%. We have not factored the MRAS acquisition in our estimates yet,” notes the analyst.

While much of RHB’s forecast for 16% earnings growth in 2019 is expected to be delivered by the Aerospace and Electronics business, Jaiswal believes an improvement in Marine profitability will also serve as a factor driving growth.

He also remains positive on STE’s ongoing efforts to build its Aerospace capabilities, which he highlights as key to the group’s growth going forward.

On the Marine front, Jaiswal believes recent order wins should alleviate some investor concerns as the segment’s earnings outlook improve.

“In 3Q18, Marine secured c.$431 million worth of contracts including for its shipbuilding business, as well as the ship and rig repair segments. Yesterday, STE announced $560 million worth of contracts for Marine in 4Q18, revenue from which should start accruing during 2H19,” says the analyst.

As at 11:l5am, shares in ST Engineering are trading 1 cent higher at $3.59 or 4.91 times FY18F book value.